The American Rescue Plan, signed into law last week, exempts from federal taxable income up to $10,200 in unemployment benefits received in 2020 if your “household” modified AGI is less than $150,000.
This exemption applies to all unemployment received in 2020, and not just the special federal $600 per week extended benefit passed as part of the stimulus package. It includes “regular” unemployment benefits paid under a traditional state program.
The $10,200 exemption is per spouse on a joint return. So, if both spouses received unemployment in 2020, they can each exclude up to $10,200. The $10,200 is “per spouse” – as IRS guidance explains, if one spouse received $20,000 in unemployment and the other received $5,000 the total amount you can exclude is $15,200 ($10,200 + $5,000).
Your “modified” AGI for claiming the exemption is your AGI before subtracting the exclusion of unemployment benefits. The $150,000 income threshold applies to Single filers, Head of Household filers, and joint filers. If you are single or a Head of Household you can exclude up to $10,200 if your AGI is $149,999 or less. If you are married filing a joint return you can exclude up to $10,200 each if your AGI does not exceed $149,999. The exclusion does not “phase-out” at $150,000. If your AGI is $149,999 or less you can exclude $10,200 per taxpayer. If your AGI is $150,000 or more you cannot exclude anything – all of your unemployment is fully taxable. So, $1.00 in actual income can increase your net taxable income by at least $10,200 or $20,400! I do not know yet how this $150,000 threshold applies to separate returns filed by a married couple.
The gross amount of unemployment received, as reported on Form 1099-G, is reported on Line 7 of Schedule 1. The amount of the exclusion is reported as a negative number on Line 8. Write “UCE” and show the amount of the exclusion claimed in parentheses on the dotted line at Line 8.
A single filer who received $16,000 in total unemployment would enter $16,000 on Line 7. If the taxpayer had no other “other income” to report on Line 8 he or she would enter ($10,200) on Line 8. If these were the only entries on Schedule 1 Part 1 Line 9, carried over to the Form 1040 or 1040-SR, would be $5.800.
Go here for the official IRS explanation of how to claim the exemption.